NY futures continued to rally this week, as May regained another 234 points to close at 81.81 cents.

On Wednesday the May contract had settled just 86 points below its contract high close of 83.79 cents, dating back to January 19, before finally letting off some steam today. The market was technically overbought after gaining nearly 600 points in just seven sessions and a correction was therefore warranted. However, after dropping to an intraday low of 80.67, buyers finally came back in and lifted the market more than 100 points off the lows going into the close.

Judging by the latest CFTC on-call report, which came out this afternoon, there are still plenty of buyers waiting in the wings. Based on the increase in May and July open interest, which was up by a combined 1.44 million to 18.85 million bales during this seven-day rally, we suspected that mills didn’t make much progress with their fixations. The on-call report confirmed that as of last Friday there were still 3.36 million bales unfixed on May and 4.29 million bales on July, for a total of 7.65 million bales. That’s about 0.18 million bales more than a week ago.

US export sales continued to impress last week, as a total of 417,700 running bales net were sold for both marketing years combined. There were still 17 markets buying, while 24 destinations received shipments of 290,800 running bales. Total commitments for the current marketing years are now at 14.1 million statistical bales, of which only 6.2 million bales have so far been exported. New crop commitments have already reached 2.2 million statistical bales, or more than double of what they were last season.

The incongruity between sales and shipments continues, as outstanding sales have now grown to 7.9 million bales. The slow pace of shipments was one of the reasons behind the market’s weakness today, as traders are worried that exports won’t reach the projected 14.5 million statistical bales by the end of July, which in turn might increase the current ending stocks projection of 6.0 million bales.

We believe that there is too much focus on the shipment number. The end of July cutoff is simply a snapshot in time and doesn’t reflect the underlying dynamics on the export front. Does it really matter whether we ship a few hundred thousand bales more or less by the end of July, when the order book from August to November is chock-a-block full?

With still 22.7 weeks to go until the end of the marketing year, we already have 14.1 million bales of current crop sales and another 2.2 million bales for August onwards on the books. These combined export sales of currently 16.3 million statistical bales could easily grow to 21 million bales or more by the end of the marketing year. For this to happen we would need to see average weekly sales of around 200,000 running bales for both marketing years combined, which seems doable.

Once again, the situation is very similar to that of last season, when a total of 14.92 million bales were exported and we started the season with commitments of about 6.3 million statistical bales. However, despite the tight balance sheet the market was quite weak by mid-summer, because speculators liquidated nearly their entire net long position, going from 12.4 million bales net long in mid-February to just 1.3 million bales net long by the middle of July.

Last summer the sentiment was quite bearish, as US and global production numbers were going up month after month and ROW ending stocks were at nearly 50 million bales in the July WASDE report. The mood is more cautious at the moment, be it because of drought conditions in the US Southwest or China becoming a stronger importer next season, after its strategic stocks have been reduced to manageable levels. There is also the fear of higher inflation, which has a lot of speculators excited about commodities.

However, when we simply look at the statistics, there is no reason to believe that the market is going to change much. The USDA just released its first estimate for the 2018/19-season during the Ag Outlook Forum last week, which showed global production at 117 million bales and global mill use at 122.9 million bales. While a production gap of 5.9 million bales looks friendly, the USDA also believes that China will take care of it by further destocking its reserves, while ROW stocks are actually expected to increase slightly, from 47.7 to 49.1 million bales. It is still early in the game, but at this point there is no reason to get overly bullish or bearish.

So where do we go from here? Renewed speculative buying has been the driver behind this latest rally, while trade shorts and particularly mills are still fighting against higher prices. Mills were proven right to wait with their March fixations, but there is no guarantee that speculators will run for the exit again in May and July.

Sell-side liquidity is the key and only speculators can provide it. We estimate that the trade will have to buy out of around 7 million bales net in May and July, which would require speculators to basically liquidate their entire net long, similar to what happened last season. If speculators fail to do so, prices are likely to stay firm and possibly spike higher. For now we go with a trading range of 79-84 cents, but we wouldn’t rule out spikes into the high 80s if the liquidity isn’t there.

Regarding a potential downside move we need to watch the financial markets, which have once again turned jittery this week after some comments by the Fed Chairman. This might trigger another round of spec long liquidation if the situation worsens, similar to what we saw in early February.

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